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The Tenorio Dairy makes cheese to supply to stores in its area. The dairy can make 250 pounds of cheese per day, and the demand at area stores is 180 pounds per day. Each time the dairy makes cheese, it costs $125 to set up the production process. The annual cost of carrying a pound cheese in a refrigerated storage area is $12. Determine the optimal size and the total annual inventory cost.

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Answer:

The optimal size of each production run is 180 pounds, and the total annual inventory cost is $832,825.

Explanation:

To determine the optimal size and total annual inventory cost, we need to consider the production capacity, demand, setup costs, and carrying costs.

Given:

Production capacity per day = 250 pounds

Demand per day = 180 pounds

Setup cost = $125

Carrying cost per pound per year = $12

First, let's calculate the optimal production size. We want to produce enough cheese to meet the demand without exceeding the production capacity.

Optimal production size per day = Minimum(Production capacity, Demand)

Optimal production size per day = Minimum(250 pounds, 180 pounds) = 180 pounds

Next, let's calculate the total annual inventory cost. This cost includes both the setup cost and the carrying cost.

Total annual inventory cost = (Setup cost * Number of setups per year) + (Carrying cost per pound * Optimal production size * Number of days in a year)

Number of setups per year = Number of production runs per year

Number of production runs per year = Total days in a year / Days per production run

Assuming a year has 365 days and each production run takes one day:

Number of production runs per year = 365 days / 1 day = 365 runs

Total annual inventory cost = ($125 * 365) + ($12 * 180 pounds * 365)

Total annual inventory cost = $45,625 + $787,200

Total annual inventory cost = $832,825

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